China Contract Dispute Resolution Clauses: Choose Certainty

When my law firm’s China lawyers draft a contract concerning China, we usually use a simple and clear dispute resolution provision:

  1. The contract is governed by Chinese law.
  2. Chinese language controls.
  3. Disputes will be resolved in China.

On the third point, we work with our client to choose either litigation before a specific court in China (it has to be one with jurisdiction) or arbitration in China. We point out that the client must pick one method: litigation or arbitration, but not both.

In discussing a dispute resolution clause, clients often propose a flexible dispute resolution provision such as the following:

  • Plaintiff has the option to choose arbitration or litigation. Once plaintiff chooses, defendant must comply.
  • Litigation or arbitration will occur in defendant’s home location; the Chinese party must be sued in China and the U.S. party must be sued in the United States.

In the 80s and 90s, most non-Chinese entities were reluctant to allow themselves to be sued in China. As a result, many contracts from that era included such “flexible” dispute resolution provisions. However, with the growth of relatively sophisticated court litigation and arbitration in China in the post-2000 era, it became clear that such a flexible approach is a mistake. In many cases, foreign companies that used such provisions found themselves with no remedy of any kind. In other cases, working through the “flexible” but complicated issues resulted in substantial delay.

For these reasons, we write our China contracts to provide only one method of dispute resolution and one forum for that process. We favor certainty over flexibility. When the time to pursue dispute resolution arises, we want to be able to move quickly and decisively.

China’s Arbitration Law requires an agreement to arbitrate must include, among other things, the parties’ intent to arbitrate and the arbitration institution where they will arbitrate. Chinese courts tend to view a dispute resolution provision as invalid if it lacks either of the above. If the dispute resolution provision gives the plaintiff a choice of the dispute resolution method, there is substantial risk that provision will be deemed to be fatally vague. For example, pursuant to Article 7 of the Interpretation of the Supreme People’s Court Concerning Several Issues on the Application of the PRC Arbitration Law (最高人民法院关于适用《中华人民共和国仲裁法》若干问题的解释), an optional provision like this will mean that the agreement to arbitrate is invalid.(第七条当事人约定争议可以向仲裁机构申请仲裁也可以向人民法院起诉的,仲裁协议无效).

Of course, this rule only comes into effect if the respondent objects. If a party submits an application with the arbitration institution to arbitrate the matter, and the respondent does not object before the first arbitration hearing, then the arbitration may proceed. (第七条但一方向仲裁机构申请仲裁,另一方未在仲裁法第二十条第二款规定期间内提出异议的除外) This may not happen often in the real world. Chinese lawyers — like lawyers pretty much everywhere — are masters of delay. Once the defendant/respondent has lawyered up, it becomes almost a certainty that it will object to arbitration on the grounds that the arbitration agreement is invalid.

In the early-2000s era, this result often meant that the foreign plaintiff was simply denied a remedy. The situation in this regard has improved. PRC courts now often take the reasonable position that even though the arbitration agreement is considered invalid, the plaintiff will still have access to the court. However, this result usually comes only after substantial cost and delay, which places the plaintiff in a weak position at the start of litigation.

Given this result, most experienced Chinese litigators agree with our position that a flexible dispute provision like this is almost meaningless because the very reason to have a dispute resolution provision is to clarify what will happen should any dispute arise. Choosing a dispute resolution provision that is not clear defeats the purpose of drafting such a provision.

We also do not like provisions — which are common throughout Asia — prohibiting any lawsuit unless and until the parties have spent 30 days “amicably” trying to resolve their dispute and then mediated their dispute. Nine times out of ten this sort of provision only drives up costs and increases delay for the non-Chinese company. If your Chinese counter-party has breached your contract, do you really want to be required to spend 30 days trying to work it out and then another 6-8 months seeking agreement by mediation?  No, you don’t, especially since you can always propose such actions after the breach in the incredibly rare case when it would make sense for you to do so.